Financial Regulation and Financial Crises - Article Example

Running head: Financial Regulation and Financial Crises Financial Regulation and Financial Crises s Financial Regulation and Financial Crises The Current Financial Crises has been dubbed as one of the worst Economic Crises since “The Great Depression”. Economic Critics agree that the regulatory framework did not keep with the speed of financial Innovations, like such as the escalating significance of Shadow Banking System, Derivatives, and off-balance sheet financing. The Asian Financial Crisis (AFC) beginning in 1997 has raised alarm bells about the process of deregulation leading to reforms now known as “Re-regulation” (Ramesh and Howlett, 2006). Explanation of today’s banking crisis, that blame “deregulation” are probably most misguided. The Fact is, The Commercial Banking and thrift industries remains the most regulated sectors of the US economy, and the historical trend has been for government to increase its intervention in these industries—withstanding occasional superficial changes in the rules by which the industries must operate. In truth, the argument against “deregulation”, simply rest on mistaken view that banker mismanagement and fraud are responsible for banking instability. Regulation is seen as restraining such impulses, while the relaxation of such restraints is thought to invite fraud and mismanagement. The argument that “deregulation has caused banking crisis” is simply another way of saying that, left to their own devices in a free or freer environment bankers will inevitably be incompetent or fraudulent. To blame “de-regulation” for the banking system deterioration is a unwarranted attempt be resurrect the fallacy that free banking is inherently unstable. That this charge is leveled in today’s context-when when we have a banking system thoroughly infused with central banking features and legal restrictions is truly remarkable. That the charge is leveled by influential voices and proposed in legislative chambers is as true today as ever. Lowell Bryan, a prominent bank consultant at McKinney and Company has advocated recently that government reimpose controls on deposit interest rates and legislative landing standards for banks, on the grounds that the banking crisis was caused by banks left free in those areas (White, 1995). Additional Crisis involving deregulation of key industries, labour conditions, and other associated inequalities and problems of economic development bring the need for a further evolution of regulation to our attention. (Ramesh and Howlett, 2006) The Formulation of Monetary policy is complicated by the change in implementation procedures and the impact of financial sector reform and capital account liberalization on the transmission mechanism. Traditional Relationships can alter, making it difficult for the authorities to distinguish between cynical developments (which may require monetary policy response) and portfolio adjustments (which may not). Arguably a delayed monetary policy response exacerbated the economic cycle in some cases; this was focused on exchange rate objectives. (Bakker, Chappel and IMF, 2002) What we have in the area of regulations is imperative to increase competition in both public and private sectors which requires deregulation as well as re-regulation. Societies concern for cheaper goods and services is counter balanced by their wish for higher standards of safety, equity and accountability, which, again requires both deregulation and re regulation (Ramesh and Howlett, 2006). Liberization creates opportunities for risk diversification but at the same time can create significant new risks for banks, particularly when combined with the deregulation of domestic financial market. Competition between financial Institutions to lend more aggressively to maintain or increase market shares. The increased ability of large corporations to borrow directly from capital markets adds to the pressure on bank. The traditionally close line between banks and their customers may be diminished, requiring banks to develop new methods of risk analysis. Combined with the tendency of economic reforms to generate increased confidence in the economy, these changes can encourage borrowing and sometime result in asset price booms. At the time, it is tempting to portray the expansion of capital inflows as reflecting portfolio adjustments. As the experiences of a number of countries illustrate, however, asset prices can rise to unsustainable levels and the subsequent price falls may precipitate a financial crises (Bakker, Chapple and IMF, 2002). Overall usefulness of capital controls, as well as their effectiveness, for advanced economies, has diminished overtime. Because partial control systems are ineffective in deregulated environment, full capital account liberalization has eventually been achieved in all industrial countries and has usually been perceived by financial markets as a sign of strength. Once capital controls have been removed, advanced countries have reintroduced them, with the exception of some backtracking during early liberalization episodes. In addition, liberalization has proved to be a catalyst for further economic reforming a number of countries. Nevertheless, liberalization has not been without its difficulties and costs. Some countries probably took too long to liberalize, and in recent years insufficient attention has sometimes been paid to the need to strengthen the prudential strengthening. Such considerations appear to have become more important in recent decades as financial markets have become more internationally integrated. The Fact that advanced countries have not sought to reintroduce controls in recent years suggests, however, that the advantages of capital account liberalizations stimulating economic growth and efficiency have more than out weighed these transition costs for advanced economies. (Bakker, Chapple and IMF, 2002) As is with gradual liberalization, experiences of rapid liberalization vary widely. However, rapid capital account liberalization has generally occurred around the same time as, or immediately following, deregulation of the domestic financial. Reform frequently coincided with a phase of powerful economic expansion, enhanced by the improved accessibility of credit. In a number of countries, the associated boom in asset prices and bank lending led to a financial sectors crisis when the economic boom ended (Bakker, Chapple and IMF, 2002). A constructive variation in dimensional change can be achieved because of regulation. Analysts time and again don’t remember, for the sake of an example, that demand of the production and social sectors are interconnected and must eventually keep up a correspondence. Thus, they advocate the policies of industrial and structural sectors without mentioning the difficulty of operational order cause not every nation could have a trade surplus every time or as if pay limitations have no effect on comprehensive order. To regulate also emphasizes the significance of political aspects for economic permanence internationally, as of now, for the sake of an example, the financial associations have lucratively achieved the task placed because of the financial crisis. (Jessop, 2001). References Bakker, A., Chapple, B., & International Monetary Fund. (2002). Advanced country experiences with capital account liberalization. International Monetary Fund Jessop, B. (2001). Regulation Theory and the Crisis of Capitalism: The Parisian regulation school. Edward Elgar Publishing. Ramesh, M., & Howlett, M. (2006). Deregulation and its discontents: rewriting the rules in Asia. Edward Elgar Publishing. White, L. (1995). The Crisis in American Banking. NYU Press. Read More